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Derivatives

Dollar Pair Vols Ease As Market Winds Down

Volatility on dollar pairs including euro/dollar, cable and dollar/yen eased last week as fewer trades were executed in the run up to the holiday-shortened Thanksgiving week. Last Wednesday three-month euro/dollar volatility stood at 9.15%, down from around 9.5% where it had hovered the week before, noted one trader in New York. Euro/dollar traded at USD1.0015 last week having traded close to USD1.01 the previous week.

Most activity has been centered around squaring off positions, with banks cleaning their books by removing trades so as not to suffer time decay over the holiday season. Most players are removing shorter dated maturities, of one-month or under, as that is where time decay has the largest impact.

In the short term, leading up to the end of year, volatility is likely to fall further, predicted traders. The new year, however, will see it pick up again as banks put on fresh positions.

Larry Brickman, foreign exchange strategist at Banc of America Securities in New York, said although the dollar has made some gains, the euro is still expected to appreciate in the next three to six months. The U.S. treasury spread is considered an important driver of foreign exchange levels and its hovering in the 40-50 basis point range, which is a positive sign for the euro. Brickman predicts the euro will appreciate to USD1.03 in three months.

EUR/USD Spot & One-Month Implied Volatility

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